DB Pensions: How can integrated risk management help charities?
May 23, 2019
If you fully understand the risks that your charity and its pension fund faces, you’re in a better position to prepare its defined benefit (DB) pension for any shocks that may come.
A survey by the insurer Ecclesiastical found that charities see pressure on funding as their biggest risk. With the future of government funding in the sector remaining unclear, and Brexit adding to the uncertainty, it’s unlikely that charities’ worries will ease any time soon. Funding challenges have far-reaching consequences, not least on a charity’s pension scheme.
As I wrote earlier this year, a recent report showed that the UK’s 40 largest charities had pension liabilities totalling £7 billion in 2017. With continued media attention about the management and funding of defined benefit pension schemes and the recent Annual Funding Statement from the Pensions Regulator indicating the direction the regulator is taking on long term funding targets and getting cash in quicker, I think now is a good time to consider strengthening support to your schemes.
The Pension Regulator has recently focused on the benefits of Integrated Risk Management, which helps organisations understand their level of protection against risks which could impact them and the pension scheme. It’s all about financial sustainability - thinking about how a charity’s own risks and those of its pension scheme integrate with each other, is vital if you’re going to avoid possible funding shocks down the line.
While options may be limited here are a few of my top tips for charities that want to manage their pension risk:
1. Consider using balance sheet assets to strengthen support to the pension scheme.
The assets owned by a charity can provide useful protection against the risk of the employer being unable to support its pension scheme for any reason. We’ve helped one charity that had a sizeable property portfolio use an asset-backed contribution structure to support its pension recovery plan, allowing it to manage the recovery plan with it’s affordability constraints.
2. Consider and quantify the risks that may impact your covenant and scheme.
The investments on the charity’s balance sheet and the assets in the pension scheme could be affected adversely by the same event. It’s essential that the investments have a different risk profile – a thorough understanding of the risks affecting both, will help you understand your full exposure.
3. Understand how your scheme would perform in a downside scenario.
Scenario planning is extremely useful in helping trustees understand the implications should the charity face a sudden cut in funding or another significant event. If you’re forewarned you can take preventative action, such as cost cutting, borrowing or deploying funds into revenue-generating assets to improve employer covenant.
The Pensions Regulator has long stressed the importance of taking an integrated approach to risk management. A systematic approach like this will help make your scheme more resilient to risk. If you want to hear more about how we can help your charity manage its pension risk, please get in touch.
